In some cases, state law allows companies to drill against your will

Don't want to sell oil and natural gas rights under your property? Too bad. In some cases, state law allows companies to drill against your will.

Shane Hoover CantonRep.com staff writer @shooverREP

Jim Huebner lives in a house on a small lot in the middle of the city.

It's hardly the place you'd expect a fight over gas and oil rights, but Huebner and driller Everflow Eastern Partners are in a tussle.

A few months after Huebner bought his home in 2008, Everflow began sending letters asking to lease his mineral rights for a vertical gas and oil well on a nearby parcel, he said.

Huebner refused each offer. He doesn't want a well in his neighborhood because of safety and pollution concerns.

So, in October, Everflow filed a mandatory pooling application with the Ohio Department of Natural Resources to include Huebner's lot, and 14 other properties, in its proposed 44-acre Sisko Unit No. 1.

The state granted Everflow's request in December, but Huebner still is fighting, arguing he should have the final say over what happens to his property.

"I don't think the state should intervene," the retired park ranger said.

POOLING & UNITIZATION

Since the 1960s, Ohio has allowed drillers to take natural gas and oil from unwilling landowners through mandatory pooling and unitization. The related legal processes started when the state restricted how closely one well could be drilled to another, so that a single property owner couldn't block resource development.

How drillers use those laws is changing with the arrival of large, horizontal shale wells. Mandatory pooling requests, used mostly for conventional vertical wells, have declined in number. Meanwhile, unitization applications — used for horizontal shale wells — are seeing repeated use for the first time ever.

"I think it's a brave new world, but it seems to be working pretty well," said Tom Stewart, executive vice president of the Ohio Oil and Gas Association.

Others aren't so sure.

HOW THEY WORK

With mandatory pooling, a driller who doesn't have a tract of land of sufficient size or shape for a well can ask the state to include the property of non-consenting landowners to round out the drilling unit. To qualify, the driller must control the majority of the acreage in the proposed unit, preferably 90 percent; must have no obvious alternate location for the well; and must have tried to lease the sought-after rights.

Unitization is a similar process, but it creates drilling areas that comprise hundreds of acres, of which drillers must control 65 percent, and is being used for horizontal shale wells that need units of 640 acres or more.

"I may be wrong, but I don't know of any (unitizations) that happened prior to all of this Utica stuff," Stewart said.Since 2011, drillers have filed 22 unitization applications,all of them for Utica Shale wells, said ODNR spokesman Mark Bruce. Of those, six have been approved. The first and largest was Chesapeake Energy's 958-acre Rufener Unit in Portage and Stark counties.

With more than 1,000 horizontal Utica Shale drilling-permits issued, unitization requests still are relatively rare as drillers concentrate on places where acreage already is leased.

But Richard J. Simmers, chief of ODNR's Division of Oil and Gas Resources Management and the person who issues pooling and unitization orders, said he expects the number to increase.

"As they drill more and more wells, they're going to run into scenarios where they encounter properties that aren't leased," he said.

LANDOWNERS

Non-consenting landowners forced into pooling or unitization are compensated, and drillers can't put a well on their property.

Before filing an application, drillers also have to show they have tried to lease the sought-after mineral rights.

"There aren't any bright-line rules as to what exactly they have to do, but they do have to make some effort," said Ryan Reaves, a gas and oil attorney with Krugliak, Wilkins, Griffiths & Dougherty.

Whether the landowner or the driller gets the better deal in mandatory pooling or unitization is subject to debate.

"The person who's pooled always gets a better deal," Stewart said, noting that landowners receive a royalty, plus a working interest in the well (a share of the cost and production). Most leases call for only a signing bonus and royalty.

Reaves said landowners are better off negotiating a good lease with a driller rather than having the terms imposed by the state.

"You don't necessarily get as good of a shake in terms of a landowner who's either forced-pooled or forced-unitized," he said.

For example, companies define gross and net proceeds differently when it comes to royalty payments, and landowners get none of the working interest proceeds until after the driller recoups the cost of the well, and after that payments still are subject to deductions for ongoing expenses, Reaves said.

If forced into a high-producing unit, a landowner might come out ahead; in a low-producing unit, it could take years to get any of the working interest proceeds. A lot depends on the well and the particulars of the chief's order, Reaves said.

The primary issue Simmers faces at this point is the vast majority, if not all of these requests, are made without any representation by the parties being forced into a unit, Reaves said.

"I think we will see some changes once some of these landowners in the future are adequately represented before the chief," he said.

STANDARDIZATION

"The companies generally think we're favoring the landowner when we issue these orders," Simmers said.

So far, the terms of his unitization orders have varied. Some non-consenting landowners have received acreage bonuses, others have not. Royalties have ranged from 12.5 percent net to 15 percent gross, and companies have been able to recover anywhere from 100 to 300 percent of the well cost before paying the remaining production proceeds.

Variations exist, Simmers said, because of differences in the economics of each request; each, basically, comes down to whether the sought-after mineral rights mean the proposed well's production will exceed the cost of drilling and operation.

"We have to try to balance the landowner's interest and the company's interest, and be as fair to both parties," Simmers said.

Landowners can attend hearings and be represented by counsel, but most haven't argued against the technical merits of the unitization requests.

"I think some of the landowners just may not understand the technical aspect of what they would have to present," Simmers said. "Cost may be part of it. They may not want to have the expense of hiring a technical group or an attorney to go in and make those arguments on their behalf."

Simmers said he wants to standardize the unitization process, taking regional geology into account, so that companies and landowners have an idea of what is likely going to happen.

Simmers' order Dec. 10 called for Huebner and the other non-consenting property owners — accounting for 2.21 acres — to get a 1/8 royalty, plus a 7/8 working interest after Canfield-based Everflow recovers the costs of the well, plus 100 percent. A representative of the company did not returns calls seeking comment Thursday.

Huebner has until Tuesday to appeal the decision to the state Oil and Gas Commission, "which I intend to do." If that isn't successful, a lawsuit could follow.

Sister Publications

Original content available for non-commercial use under a Creative Commons license, except where noted.
Times Reporter ~ 629 Wabash Ave. NW New Philadelphia, OH 44663 ~ Privacy Policy ~ Terms Of Service